Retirees who draw extra money from a traditional 401(k) to cover large expenses may not realize the full cost until two years later, when Medicare uses that income to set their premiums. The mechanism is called the Income-Related Monthly Adjustment Amount, or IRMAA, and it can significantly increase what retirees pay for Medicare Part B and Part D coverage.
According to a report by MarketWatch, the issue arises because Medicare uses a two-year look-back period. A large 401(k) withdrawal made this year will appear in the income data used to calculate Medicare premiums in 2028. The delay creates a gap between when the money is spent and when the premium impact arrives.
The question of whether a retiree can file paperwork to flag a large withdrawal as a one-time event and avoid the surcharge has a fairly clear answer. It does not qualify. The Social Security Administration allows premium reconsideration only for specific life-changing events. Those include retirement, the death of a spouse, divorce, and a substantial reduction in work hours. A discretionary financial transaction, such as a large 401(k) withdrawal, a Roth conversion, or the realization of capital gains, does not meet that standard.
The financial stakes are real. For 2026, the maximum IRMAA surcharge for a married couple in the highest bracket is roughly $6,936 per person per year, or $13,872 for a couple. IRMAA thresholds are staggered, so not every large withdrawal will push a retiree into the maximum bracket, but even mid-range surcharges can add hundreds of dollars per month to Medicare costs.
Retirees who receive Social Security and pension income that covers most of their bills, and who use 401(k) withdrawals for larger or irregular expenses, may be managing their withdrawals carefully to stay below the IRMAA income thresholds. That is a reasonable strategy. The challenge comes when a larger expense requires a withdrawal that crosses one of those thresholds.
The Social Security Administration recalculates IRMAA annually using tax data it receives from the IRS. Because of the two-year lag, a retiree whose income drops in the year after a large withdrawal will not immediately see a reduction in premiums. The lower income will eventually be reflected, but only after the delay works through the system.
For retirees considering a large withdrawal, the practical advice is to account for the two-year premium impact as part of the total cost of the transaction. Even after capital gains taxes and IRMAA surcharges, the net value of the withdrawal may still be positive depending on what the money is used for. A financial adviser can help model the full cost before the decision is made.
One additional tax exposure is worth noting. Retirees with investment income may also face the 3.8% net investment income tax on earnings above certain thresholds. A large 401(k) withdrawal that pushes modified adjusted gross income well above normal levels could interact with that tax as well, adding to the overall cost of taking a lump sum in a single year rather than spreading withdrawals across multiple years.
